ECONOMIC GEOGRAPHY OF FIRMS AND SKILLED LABOR*

ABSTRACT This paper investigates the relationship between firm location and skilled‐labor location. While existing new economic geography (NEG) models could not explicitly analyze the relationship due to their assumptions, I construct a new NEG‐type model allowing for different location dynamics of firms and skilled labor for this objective. The main results are as follows. First, a relatively large pool of skilled labor attracts firms when trade costs are small, while it might repel firms when trade costs are sufficiently large. Second, assuming that skilled workers are mobile between regions, the model shows that skilled workers agglomerate faster than firms with decreasing trade costs. Third, the model supports the hypothesis that firms follow skilled labor rather than the reverse. These results are consistent to Indian and Chinese experiences, and some “creative‐class” or “skilled‐city” stories.     

AGGLOMERATION VERSUS PRODUCT VARIETY: IMPLICATIONS FOR REGIONAL INEQUALITIES*

ABSTRACT We investigate how cross‐country differences in firms' fixed set‐up costs affect the trade‐off between global efficiency and spatial equity. Our analysis reveals that the standard assumption of symmetry in set‐up costs masks the existence of an interesting effect: the range of available varieties depends on the spatial distribution of firms. In such a setting, where the market outcome leads to excessive agglomeration in the symmetric case, a planner may opt for asymmetric set‐up costs and even more agglomeration. We show that the planner will always favor lower set‐up costs in the large country with more agglomeration when the consumer's marginal preference for variety is high, or with less agglomeration when the consumer's marginal preference for variety is low.     

THE OPTIMAL DISTANCE TO PORT FOR EXPORTING FIRMS*

ABSTRACT Success in international trade depends, among other things, on distance from markets. Most new economic geography models focus on the distance between countries. In contrast, much less theorizing and empirical analysis have focused on how distances within a country—for instance, due to the location behavior of exporting firms—matter to international trade. In this paper, we contribute to the literature on the latter by offering a theoretical model to explain the optimal distance that an export‐oriented firm would locate from a port. We present empirical evidence in support of the model.     

FIRM HETEROGENEITY,MULTIPLANT CHOICE,AND AGGLOMERATION

We examine the organization and location choice of heterogeneous firms in a two‐region economy. When some high‐productivity firms engage in multiplant production, a reduction in transport costs causes two changes in a small region: the closure of plants by high‐productivity multiplant firms and the relocation of low‐productivity single‐plant firms to the region. In the presence of high‐productivity multiplant firms, therefore, a decline in transport costs reinforces the spatial sorting of firms by productivity, enlarging the productivity gap between large and small regions. Conversely, reducing investment costs weakens the spatial sorting effects on regional productivity disparities.     

Location and collaboration: Manufacturing firms' use of knowledge intensive services in product innovation

The paper addresses the relation between geographical location of firms and collaboration with knowledge intensive service providers on product innovation in a small country setting. The analysis shows that even in a small country with limited geographical distances firms located in peripheral areas are less likely to be broad users of collaboration with knowledge intensive service providers in the process of product innovation than firms located in major urban areas. However, it is only amongst firms located in the periphery that collaboration strategy seems to matter in the sense that differences in development in employment can be detected between broad and rare users of collaboration.     

PREFERENCE HETEROGENEITY AND ECONOMIC GEOGRAPHY*

ABSTRACT We investigate the effect of preference heterogeneity between skilled and unskilled workers on agglomeration, and we identify a new source of dependence of equilibrium prices on the demand properties shaped by the inter‐regional distribution of workers. We find a new preference effect, and we show that when the intensity of skilled workers' preference for the modern good and its variety is strong enough, prices charged by firms may even increase when the mass of local firms increases, therefore acting as a new dispersion force when trade costs are low or as a new agglomeration force when trade costs are high.     

AGGLOMERATION,TRADE, AND SPATIAL DEVELOPMENT: BRINGING DYNAMICS BACK IN*

ABSTRACT The field of spatial economics has made enormous progress in theorizing and measuring agglomeration effects, trade costs, and urbanization. Typical models establish structural determinants by making strong assumptions about which forces are relevant and how these forces interact. But many of these assumptions, about firms, agents, spatial costs, and market structures, are questionable. As a result, the field has a long way to go to establish causality, and to be able to account for spatial economic dynamics.     

DISPERSION FORMS: AN INTERACTION OF MARKET ACCESS,COMPETITION, AND URBAN COSTS*

ABSTRACT This paper analyzes a two‐region model including multiple industries with different transport costs. Two results are derived. First, dispersion occurs for small transport costs, but the specific dispersion patterns depend on the level of urban costs. This results from an interaction of the market‐access effect on consumers, the market‐access effect on firms, the competition effect, and the urban‐cost effect. Second, decreasing transport cost tends to let industries with lower transport costs disperse, although the shares of industries locating in the larger region are not in order of their transport costs. We further provide some empirical data concerning the second result.     

LOCATING OUTSIDE A LINEAR CITY CAN BENEFIT CONSUMERS*

ABSTRACT We investigate the effects of restricting the locations of firms in Hotelling duopoly models. In standard location‐price models, the equilibrium distance between firms is too great from the viewpoint of consumer welfare. Thus, restricting the locations of firms and shortening the distance between them improves consumer welfare by reducing prices and transport costs. We introduce strategic reward contracts into location‐price models and find that, in contrast to the above result, restrictions on the locations of firms reduce consumer welfare. These restrictions reduce transport costs but increase prices by changing the strategic commitments of the firms.     

Trade Fairs as an Export Marketing and Research Strategy: Results from a Study of Korean Advanced Machinery Firms

Manufacturers pursuing information on potential customers in distant, dynamic markets confront myriad obstacles. To address this, many firms attend international trade fairs in order to market their products, to meet with prospective customers, and to tap into buzz related to potential international opportunities. In many ways, moreover, such exhibitions can serve as short‐term agglomerations of same‐industry activity, particularly important for producer–user interface geared towards innovation. The goal of this paper is to explore how Korean machine tool manufacturers utilise a major global trade show in Seoul to minimise the difficulties associated with accessing a global customer base, inclusive of their activity at this show geared towards innovation. Evidence from firm‐level surveys and interviews suggest that the amount of importance placed on trade fair attendance as part of a firm's internationalisation strategies is related to export growth. Additionally, a new insight generated is that firms that participate in trade shows as part of their innovation process also demonstrate higher rates of export intensity. Finally, we may be witnessing newly discovered, technology‐driven, symbiotic relationships between online portal sites, vendors, and potential customers at these trade fairs, where virtual services are nonetheless augmented by a need for a continued onsite presence at these exhibitions.     

Do industrial districts influence export performance and export intensity? Evidence for Spanish SMEs' internationalization process

This paper seeks to enhance the understanding of the role of the industrial districts in the internationalization process of small and medium-sized enterprises (SMEs). The study focuses essentially upon the following issue: Can the location inside industrial districts influence the export performance and export intensity of the Spanish SMEs? To address this question, this study draws upon a sample of 285 manufacturing firms located in the Valencian community (a Spanish region) surveyed during the period January 2000 to March 2000. It is shown that industrial district location, marketing differentiation, institutional networks, clients' networks, competitors' networks and global orientation of sector and company have a clear influence on firms export performance and export intensity. The results are basically consistent with the limited previous research.     

Economic interdependence and international interactions: the impact of country size on political conflict and cooperation

The trade–conflict model claims that one state, designated as the ‘actor’, is deterred from initiating conflict against a trading partner, designated as the ‘target’, for fear of losing the welfare gains associated with trade. This article extends the trade–conflict model to examine the effect of country size on the trade gains among countries. We derive three propositions with regard to international interactions that pertain to the links between trade, conflict and country size. These hypotheses all imply that a country with an improvement in its terms of trade with a large country will decrease conflict more than it would with an improvement in its terms of trade with a small country. A 30‐country sample from the Conflict and Peace Data Bank (COPDAB) is used for empirical tests. The empirical analyses support the derived hypotheses. The model predicts that a country's ability to influence domestic consumption in a trading partner is an important determinant of international interactions.     

OPENNESS TO TRADE AND INDUSTRY COST DISPERSION: EVIDENCE FROM A PANEL OF ITALIAN FIRMS*

ABSTRACT We use Italian firm‐level data to investigate the impact of trade openness on the distribution of firms across marginal cost levels. In so doing, we implement a procedure that allows us to control not only for the standard transmission bias identified in firm‐level TFP regressions but also for the omitted price bias due to imperfect competition. We find that more open industries are characterized by a smaller dispersion of costs across active firms. Moreover, in those industries the average cost is also smaller.     

The Geographic Effects of Trade Liberalization with Increasing Returns in Transportation

Abstract This paper develops a model of economic geography that examines how the distribution of economic activity may change as a country opens up to foreign trade. The distinctive features of the model are that transportation is costly between locations within a nation as well as between nations, and that these transportation costs are subject to increasing returns to scale. A result of the model is that trade liberalization may cause the population of a country to become more concentrated in a single megalopolis. The large megalopolis may reduce welfare due to congestion costs, which implies that liberalization may unexpectedly leave the country worse off.     

ARE LOCAL MILIEUS THE KEY TO INNOVATION PERFORMANCE?*

ABSTRACT This study investigates how local milieus foster innovation success in firms. We complement the common practice of linking firm performance indicators to regional characteristics with survey evidence on the perceived importance of locational factors. While the former approach assumes that location characteristics affect all firms in the same way, the survey allows us to model how firms judge the attractiveness of locations using a heterogeneous set of criteria. It turns out that the availability of highly skilled labor and the proximity to suppliers matter for firms' innovation performance. Interestingly, location factors obtained from the survey provide a more accurate explanation of how local milieus facilitate innovation.     

ON THE OPTIMUM LOCATION OF VERTICALLY RELATED FIRMS WITH SIMULTANEOUS ENTRY*

ABSTRACT This paper considers a case of bilateral monopoly and examines the possibility of an intermediate location for two vertically related firms under simultaneous entry, and then analyzes the welfare-maximizing location for both firms. It shows that whatever the case, an intermediate location for both firms is unlikely to occur and that the pattern of industrial location under welfare maximization is equivalent to the one under perfect competition, but is different from the one under bilateral monopoly under certain circumstances.     

FRAGMENTATION AND CLUSTERING IN VERTICALLY LINKED INDUSTRIES*

ABSTRACT This paper models the location of two vertically related firms in a low labor cost country and in a country with a large market. The upstream industry is more labor intensive than the downstream industry. We find that spatial fragmentation occurs for low values of the input‐output coefficient and intermediate values of the transport rate, particularly if the countries are very asymmetric in size. Otherwise, we obtain agglomeration either in the low cost country (when the transport rate is low) or in the large market (when the transport rate is high). Multiple agglomerated equilibria arise when the transport cost of the intermediate good is significant.     

DOES AGGLOMERATION MATTER EVERYWHERE?: NEW FIRM LOCATION DECISIONS IN RURAL AND URBAN MARKETS*

We test whether commonly used measures of agglomeration economies encourage new firm entry in both urban and rural markets. Using new firm location decisions in Iowa and North Carolina, we find that measured agglomeration economies increase the probability of new firm entry in both urban and rural areas. Firms are more likely to locate in markets with an existing cluster of firms in the same industry, with greater concentrations of upstream suppliers or downstream customers, and with a larger proportion of college‐educated workers in the local labor supply. Firms are less likely to enter markets with no incumbent firms in the sector or where production is concentrated in relatively few sectors. The same factors encourage both stand‐alone start‐ups and establishments built by multiplant firms. Commuting decisions exhibit the same pattern as new firm entry with workers commuting from low to high agglomeration markets. Because agglomeration economies are important for rural firm entry also, policies encouraging new firm entry should focus on relatively few job centers rather than encouraging new firm entry in every small town.     

The Importance of the Distribution of Consumers in Horizontal Product Differentiation

This paper examines the importance of the distribution of consumers in Hotelling's circle on the comparison between the optimal and the market equilibrium levels of diversity. It finds that when most consumers are located very close to the firms, the result of Salop—that the equilibrium number of firms is larger than the optimal one (surplus maximizing)—can be reversed.     

DO LOCATION‐BASED TAX INCENTIVES IMPROVE QUALITY OF LIFE AND QUALITY OF BUSINESS ENVIRONMENT?

We examine how location‐based tax incentives affect quality of life and business environment through changes in property values and equilibrium wages. Using the federal Empowerment Zone program, we determine whether offering tax incentives to firms improves the welfare of the citizens and attractiveness to firms. We demonstrate that quality of life methodologies can be applied using small geographically aggregated data, such as census block groups. We find that the tax incentives offered by the program notably enhances the quality of business environment for firms in the area while modestly improving the quality of life for the individuals living in the area.